No one monitoring financial advisers, Labor warns

A dangerous vacuum has emerged in the regulation of the troubled financial advice sector as a result of the federal government's delayed establishment of a Hayne-recommended disciplinary body, Labor has alleged.

Appearing before a Senate estimates hearing on Wednesday evening, financial services and superannuation minister Jane Hume came under fire over the decision to scrap plans for a code monitoring body to oversee compliance with a controversial new code of ethics for advisers.

Hayne blame

Senator Hume said the original plans were "unfortunately" shafted by Hayne's "single disciplinary body imperative" which caused the intended timeline to blow out.

She explained that, in the interim, the corporate regulator and financial services licensees would monitor compliance with the code.

ASIC has previously made clear that licensees – companies that provide an Australian Financial Services Licence to third party advisory firms, also known as "dealer groups" – would have primary responsibility for monitoring compliance and reporting breaches.

Commonwealth Bank, National Australia Bank, AMP and IOOF control some of the nation's largest licensees, with the rest belonging to privately owned and boutique firms. ANZ and Westpac have sold their dealer group operations.

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In an increasingly terse exchange, Senator McAllister blasted the government's approach to adviser code enforcement, claiming vesting power in licensees was a dangerous continuation of a broken system.

In response to Senator Hume's explanation that "dealer groups have monitored adviser compliance since forever and a day", Senator McAllister said: "That’s why we had a recommendation to do something different, because that wasn’t working, and now we have another 12 months."

She went on to describe the self-regulatory model of licensee supervision as a "total disaster" and call for immediate independent oversight.

Senator Hume said ASIC has been informed prior to the scrapping of the code monitoring body being publicly announced.

“ASIC are capable of doing what they need to do while the code settles in and until the disciplinary body was established,” she said, when asked if additional funding was provided to the regulator to perform the task.

Outside the tent

The minister revealed more detail about the decision to change the code monitoring plans, explaining that the industry bodies who held up their hands to take on the role had made unpalatable demands.

“The only groups that put forward applications to take on that role wanted a form of guarantee from government that they could operate for a number of years to make it financially viable,” she said. “We couldn't make that offer to them.”

It is understood that a single application was made to become the code monitoring body, by a consortium of industry bodies including the AFA, Financial Planning Association (FPA), FINSIA, SMSF Association, Stockbrokers and Financial Advisers Association and Boutique Financial Planners.

Participating in the now-defunct Code Monitoring Australia would have given the associations a quasi-regulatory role, akin to the industry-led and often criticised FINRA authority in the United States.

The code of ethics and broader financial adviser standards regime is widely seen in the industry as a pre-Hayne relic of the retired previous financial services minister Kelly O'Dwyer's tenure.

The banking royal commission did not make any recommendations in relation to financial adviser education standards.

Aleks Vickovich is the wealth editor. He writes about financial advice, superannuation, investment and regulation from the Financial Review's Sydney newsroom. Connect with Aleks on Twitter. Email Aleks at aleks.vickovich@afr.com

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